Insurers are breathing a sigh of relief today after the Ministry of Justice announced a softening of its drastic cut to the Ogden Rate. The original change, from 2.5 per cent to -0.75 per cent, caused dismay in the insurance industry when it was announced earlier this year. However today the MoJ said the rate will instead be set between 0 and 1 per cent.
The change will not be immediate as the adjustment will have to go through Parliament, giving the less technologically up to date insurers time to act. However Markerstudy’s Group Underwriting Director Gary Humphreys said that Markerstudy implemented the original change to their in-house centralised rating platform, RDT’s Equator, as soon as it was announced. He added that “the less technologically advanced insurers will take longer to implement change”.
The initial cut, which came on the heels of an increase to Insurance Premium Tax, would have had serious negative implications for insurers and was labelled ‘crazy’ by the ABI. Ernst and Young calculated that a -0.75 per cent Ogden rate would have cost motor insurers £3.5bn, leading to an increase of up to £75 for the average car insurance premium.
After an outcry from the insurance industry, the government launched a consultation examining how and by whom the rate should be set. The ABI assisted by creating a framework for setting the discount rate and suggested a system using two rates for the calculation of payments, one for short-term needs and another for long-term.